Did you delight your customers today?

I’d like you to take a moment to reflect on your typical workday.

What tasks and activities make up your average day?

Do you feel in control or swamped?

Do you have a clear understanding of how you are contributing value to your customers?   Or do you just ‘get stuff done’?

For many people, the typical response goes something like this:

“On the way to work, I’m already on email, getting across the things that I have to get done today.  The work comes at me and I do my best to get it done by the end of the day.  I often get interrupted (either with new work or with irrelevant intrusions), but if I push through, I usually manage to get it all done before I go home.

Did I create value for our customers?  I guess I must have, or they wouldn’t pay me to do this job, would they?”

For many of us, it’s not hard to relate to this narrative – not so much because of who we are, but because of the environment we work in.

Now compare the above response with this:

“My sole purpose at work is delighting the customer.  My friends used to look at me funny when I said this, because they know I work in Accounts – hardly a frontline, customer-facing role.  But because I know all my colleagues have the same purpose in their work, we get things done and have a great time along the way.  For us, the journey really IS the destination.”

Too often, the companies we work for try to create “pseudo-purposes” out of the intermediate steps we take in serving our customers, with metrics such as ‘percentage utilization’, ‘cost to serve’ and other seemingly harmless measures.  The problem is that these metrics completely hide the true objective of the enterprise, replacing it with sub-goals (often known as “business drivers”) that are neither inspiring nor necessarily optimal.

Small wonder, then, that we end up with silos, factions and people working at cross-purposes – if I’m trying to maximize utilization and you’re looking to keep someone free for a project that is important to your personal KPIs, we’re going to have a problem.

With a clear focus on the customer, however, these problems become the exception rather than the norm.  It’s no longer about “how much did I get done today?” or “I’d better meet my KPIs”, but rather “how many customers did we delight today?”  Even the use of “we” rather than “I” reinforces that we’re all in it together.

And how much more inspiring is it to constantly be thinking of how to delight customers than meeting arbitrary internal measures?

You may think this is an oversimplification or a fairytale – “it doesn’t work like this in the real world”.  But try to suspend disbelief for just for a moment and think about an organization that delighted YOU recently – what do you think was on the mind of the people who served YOU?

Time to pick a national champion?

“In the mid-1960s, when Australia’s trade minister Sir John McEwen was urging Holden and Ford to seek export markets in Asia, the leader of one of Asia’s poorest countries decided his country needed a car industry.  Defying the advice of economists, he ordered the country’s biggest company to start making cars – with Ford’s assistance.  That country was South Korea … [and] the company was Hyundai.”

Tim Colebatch, Economics Editor, The Saturday Age, 25th May 2013

 

The switch to laissez-faire economics in the latter part of the 20th Century brought considerable benefit to many economies that were struggling at the time.  The UK had it’s Winter of Discontent and Australia was on the verge of becoming, to coin a phrase of the time, a Banana Republic.

The de-nationalisation of a number of key industries and institutions, coupled with a radical reduction, or outright removal, of tariffs and other trade barriers, brought much needed vitality and prosperity to the countries that embraced the ideology of free markets.

But, like all good ideas, one questions whether the adoption of the ideology has gone too far – from a level-headed application of some key principles to a fanaticism that is stifling good judgement – a fanaticism that is hindering, rather than helping, economic progress.

In the past two decades, Australian governments have shied away from making a call on significant investments in nation-building initiatives, leaving almost every big decision to the ‘free market’.  The main exception to this rule has been, perversely, to intervene to prop up inefficient and uncompetitive industries such as car manufacturing for reasons of political expediency.

Meanwhile, other countries that have had the courage to make investments in growing industries such as information and bio technology have seen their investments pay off handsomely.  Singapore’s evolution from a relatively poor country when it was formed to a global leader in trade and financial services today is a clear example of positive government intervention in the economy.

The time has come for the Australian government to be bold, to develop clear policy and supporting incentives to underpin the county’s future prosperity.

The investment opportunity set is wide and varied:

  • added value in mining products
  • leadership in healthy food products that are free of GMOs
  • creating technology hubs with supporting financial investment communities
  • doubling down on financial services (on the back of Australia’s strong and respected financial services regulation)
  • the list goes on…

Australia cannot compete on low-value manufacturing – but it also cannot solely rely on comparative advantage in mining extraction.    A country cannot operate a sustainable economy on the whims of volatile commodity cycles.

The time has come to take some bold decisions and put some money on the table.  The South Korean and Singapore examples show that this is a long game – not something that can be manufactured in a single electoral term.  Let’s hope our politicians can put the national interest ahead of vested interest, for the good of not only this generation, but more importantly for those still to come.

 

 

 

 

If families were funded like public companies…

Imagine, if you will, that your family has just decided to run their finances like a public company, including the following controls:

  • the financial plan for the family is now agreed annually, in advance of the financial year covered by the plan
  • the plan has capital expenditure (capex) and operational expenditure (opex) budgets
  • budgets are sacrosanct and shall not be changed throughout the year (expect when income does not meet forecast – see next control)
  • operational expenditure is planned quarterly, and is adjusted down in the next quarter if income does not meet forecast
  • capex and opex shall never be confused or traded off

So let’s just play that out:

The Jones family starts the year with the following (admittedly very simplified) plan:

  • Cash at hand (capital): $50,000
  • Forecast income: $100,000
  • Forecast operational expense: $80,000
  • Savings (retained income before capital expenditure): $20,000
  • Planned capital expenditure: $20,000

According to this plan, the family will end the year pretty much where is started financially (although with an additional asset(s) valued at $20,000 – note that we are also ignoring asset appreciation/depreciation, for the sake of simplicity).

And so the year starts.

Income in the first quarter is $25,000 and expenses are $20,000, so everything is wonderful. Given things are going so well, the Jones spend $15,000 of their capex budget and install a new kitchen.

But then, in the second quarter, Ken Jones loses his job. Income falls to $15,000 for the quarter, and operational expense is commensurately cut to $10,000.  New jobs are not easy to come by and the family is really starting to suffer.

By the third quarter, things are getting desperate.  The drop is operational expense means the family is now eating instant noodles very night and lights go out at 8pm to save on electricity.

Out of the blue, a great job opportunity comes up for Ken.  The only catch: it’s in the next town, and he needs his own transport to get there.  The capital budget only has $5,000 left, so buying a reliable car is a real stretch – but finally Ken finds one and the deal is done.  He starts his new job, and the expense budget goes back to normal.

Well, for two weeks, that is – then Ken’s car is stolen.

Unfortunately, given the operational expense budget in the third quarter could only afford the minimum third-party insurance, the theft is not covered and the capital is gone.

Unable to get to work, Ken loses his job (for the second time!) and the family must now live out the final quarter of the year on the reduced operational budget. More instant noodles and early nights…

The family is not totally despondent, however, as the new financial year is just around the corner!  They all know that that means a new capital budget (which will allow them to buy a new car!).  Ken’s most recent employer already said he could come back anytime he had the means to be there reliably, so all they need to do now is wait for the first day of the new financial year.  Thank goodness for annual financial plans!

It may seem that this story is a bit trite and condescending, but it actually mimics the financial ‘discipline’ that is used for budgets and funding in many public companies.

Specifically:

  • capital budgets are fixed and shall not be exceeded (even if, as in Ken’s case, there is a significant economic cost to the family that could be easily avoided by releasing additional capital to buy a new car)
  • retained income (earnings) are sacrosanct – we’d rather the family (employees) starve than admit to the neighbours (market) that we can’t manage our money
  • the financial year is also sacrosanct – should a great opportunity to make even more income appear, if the budgeted capital is spent, the family must wait until next year to invest

The message from this tale: you wouldn’t do it if it were your own money.

The problem is not that there should be no financial controls in public companies (even individuals and families run a budget of some kind or another), but rather that controls should be managed within the context of the objective of the public company: to make an adequate (or better) return on investment for shareholders.

If the opportunity to make more money exists now, surely waiting until the capital budget is ‘refreshed’ is not only sub-optimal – it could also mean the opportunity is lost.

Similarly, the cost of idle resources (Ken in the case above) is also an operational cost (either opportunity or cash).  While ludicrous in the case above, this is exactly what happens in public companies when capital projects are stopped (due to funding cutbacks) and the employees working on them are put on ‘other duties’ until the new capital year.

The next article in this series will discuss why public companies operate like this, and the changes they can adopt to focus more on value creation and less on ‘keeping to budget’.

Where’s the Productivity Gain?

According to Forrester Research, global IT spend in 2011 was estimated to be $US1.7 trillion.  Gartner, which also includes telecommunications spend in its estimates (ICT spend), put the figure at $3.6 trillion.

To put that in perspective, the Department of Economics at U.C. Berkeley estimated that Gross World Product (or global GDP) was around $70 trillion in 2011.  So on those measures, ICT spend accounted for over 5% of global economic output in 2011 (or 2.4% for IT alone).

One would expect a substantial economic benefit from an investment of that proportion, and yet anecdotally at least, the report card doesn’t read well.

Business stakeholders are increasingly skeptical of the benefits promised in business cases for IT projects, and I would argue this is largely because of the system used to fund these investments.

The process typically relies too much on risk avoidance (i.e. build in every contingency possible), lots of process and paperwork (because that way we’re sure to get it right), and little in the way of benefit assessment once the project is complete (as everyone has moved on to the next big thing).  The process takes far too long, is very inflexible and generally does not have the same type of scrutiny (vis-a-vis realised return on investment) as other large-scale investments.

A better way would be for businesses to fund smaller, experimental projects, with minimal capital at risk and a very short time to market, so that real data can be collected and interpreted about the actual business benefits derived.  Indeed, there are many companies that are now taking this approach to IT investment with great success.

This approach not only ensures that benefits are actually compared against the project costs that were incurred (a rarity in enterprises these days, in my experience), but also  allows a more robust business case to be developed for the large-scale implementation of the product/service/innovation.

This approach also makes it easier to kill an idea that, although it looked good on paper, turned out to be not so compelling a proposition in the real world.  The stakes are dramatically reduced when the initial capital investment is minimised, and the learnings can also be used to move the business in a more promising direction.

Most important of all, this approach ensures that the vast majority of capital is directed to investments that deliver significant and quantifiable returns on investment, instead of being wasted on projects that have ‘deliverables’, but do not deliver any real value.

So, where’s the productivity gain? The inputs (in dollar terms) can remain the same, but the outputs increase substantially, delivering the productivity gains from IT investment that have long been promised, but rarely are delivered.

Why we study Demand

I was pairing on a workshop recently, the objective of which was to help a leadership team understand their work (i.e. the work being done by their division).  We were using a Systems Thinking model to guide the group, and our first step was to identify the Demand coming into the division (i.e. the requests for work that they received, whether through formal channels (forms, client meetings, etc) or informal (hallway chats are a great example)).

While the group was able to quickly identify many channels and sources of Demand across the division, I could sense some trepidation with the process.  So I took a brief segue to discuss WHY we study demand:

The reason we study demand is for the insights it brings into the work we end up doing, which can be broken down into four main categories:

  1. The work that we can do right now that would create the most value for our customer
  2. Other work that, while not being the most valuable activity that we could be doing right now, has real value for the customer
  3. Failure demand (i.e. work that we are having to do now, because of something we didn’t do right the first time); and
  4. Work that we shouldn’t be doing at all (either because someone else should be doing it, or because it creates no value at all for our customers)

With this clarity, the group quickly understood why we were studying Demand: to get a clear understanding about where the real value was being created in their team, so that they could remove or reassign all the other activities and focus their energies on delivering this value to the customer.

It is certainly true that this identification process is only the start: the real work begins when we start to say no to the ‘valueless’ work, and when we change our processes and practices to reduce and remove failure demand.  But the WHY is crucial to the process.  The WHY uncovers the simple truth about why we’re there in the first place: to serve our customers and deliver value to them as best we can.

Anything less is an abrogation of our promise to our customer.

Historical Budgeting kills Business Agility

Ever been on a project where everyone (including the project sponsor) has come to the realisation that the project will never deliver the value that was promised? And despite this common understanding, the project just carries on regardless?

Blame historical budgeting.

Traditional (historical) budgeting, whether bottom-up or top-down, typically involves taking last year’s revenue and expenses and adding a growth factor to each side of the ledger (usually a higher growth factor on the revenue side than the expense side).  This then sets the playing field for the year ahead (i.e. the revenue that the business needs to bring in and the expense that it is permitted to spend, with the planned profit as the remainder).

The expense is further broken down into capital expenditure (capex) and operating expenditure (opex).  Capital expenditure, in particular, may span over multiple years.  Further complicating matters is that both types of expenditure have rules that dictate what can be categorised as capex or opex (as the categorisation can have a significant impact on financial performance reporting and tax liabilities).

While I understand that many of you reading this article will know most of this already, where I’m heading to is the adverse behaviour that this budgeting approach results in, and what can be done to change it.

So, what are the problems with this approach to budgeting?

The major drawbacks include:

  • Internal Focus
  • Budget Hoarding by Silos
  • “Use It or Lose It”
  • Annual Planning Mindset

Internal Focus: as the key determinant of the size of the budget is “what we did last year”, the plan is almost totally determined by the organisation’s past performance (an internal measure), not market dynamics (e.g. changing preferences, entry/exit of major competitors, substitution, innovation, etc.).  To be fair, most organisations do a “reality check” on the numbers, by comparing with sales forecasts and other leading indicators, but the key driver of this year’s plan is nonetheless last year’s performance.

Budget Hoarding by Silos: given the self-reinforcing nature of the historical budgeting cycle, departments/divisions/teams hold on dearly to any expenditure budget they are allocated.  By way of example: if my division gets $1m to spend this year, and we then find that $0.5m can be invested elsewhere for a higher ROI, that should be seriously considered, right?  The problem for me is that then means I only ‘spent’ $0.5m this year (which becomes the baseline for next year’s plan – $0.5m less than the year before!).  Which also leads to…

“Use It or Lose It”: Similar to the example above, if I underspend my expenditure budget this year, I am actually penalised under the historical budgeting model for saving money! For example, underspending $200K on a $1m budget this year means that $800K becomes the new baseline for next year.

Annual Planning Mindset: Perhaps worst of all, historical budgeting means revenue and expenditure plans are reviewed and agreed only once a year.  Given that the process often begins 6 months before the start of the new financial year, this means that the impact can stretch over 18 months!  This effectively creates a huge damper to business agility, with organisations unable to move quickly to adapt to new opportunities and rapid changes in the business environment.

So what to do about it?

Beyond Budgeting is a good place to start.  The Beyond Budgeting Roundtable articulated 12 principles underpinning an alternative management model, including making “planning a continuous and inclusive process; not a top-down annual event” and making “resources available just-in-time; not just-in-case”.  (A full list of the principles can be found at: http://www.bbrt.org/beyond-budgeting/bb-principles.html).

Ultimately, the key to Business Agility from a financial perspective is flexibility in implementation.  It’s not that the original plan is necessarily wrong, but more that the plan itself becomes “the written word”, instead of being a starting point that is continually adapted as new information becomes available.  The greater the flexibility in implementation, the more responsive the business can be to market shifts and (often fleeting) opportunities in the marketplace.

© Eric Jansen 2012. All rights reserved.

Business Agility Defined

The term ‘Business Agility’ gets a lot of airplay these days – but what does it actually mean?

Much as the term agile has been increasingly used (abused?) in the IT industry to describe a high-performing software development team, Business Agility is now also becoming a term that is increasingly heard in business circles.  Like the term agile, however, people often find it difficult to be specific when describing what business agility actually means.  Responses are usually of the kind: “being flexible”, “capitalising quickly on new opportunities”, etc. – which is fine, but how does an organisation actually do this?

The following diagram depicts six key components of an organisation that exhibits Business Agility:

  • Adaptive Planning: Above all, the organisation needs to be able to plan and execute simultaneously.  Sequential planning leads to a very rigid implementation approach, whereas adaptive planning allows (indeed, encourages) many course-corrections along the way.
  • Focus on Time to Value: There is an almost obsessive focus on getting new products/services/features to market as soon as possible.  This enables a shorter feedback cycle and, equally importantly, an quicker timeframe to earn a return on the investment made.
  • Decoupling: This is where a lot of businesses (particularly larger enterprises) find it very difficult to move quickly to exploit new opportunities.  The more each business process is intertwined (coupled) with others, the harder it is to implement change quickly.
  • Low Latency: While this attribute could be consider an underlying theme, it is worth calling out as a specific component.  The quicker a decision can be acted upon, the sooner the business knows whether the decision was right and what else needs to be done to achieve the underlying goal.
  • Economic Efficiency: A lazy, bureaucratic organisation will protect its turf at the cost of progress and innovation.  Lean operations that minimise waste have the added incentive of promoting new and innovative ways of doing things, and being able to implement them quickly.
  • Rapid Adaptation: While similar to Adaptive Planning, this component really refers to the mindset of continual monitoring of, and adaptation to, changing market conditions.  It is the ultimate feedback mechanism that ensures the product/service offering is continually refined to best meet the needs/constraints of customers, suppliers and partners.

Focusing on how you can introduce/expand the above disciplines in your organisation will bring real meaning to the term Business Agility.  As a result, the business will be better placed to exploit new business opportunities in today’s rapidly-changing competitive marketplace.

© Eric Jansen 2012. All rights reserved.

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